10 Ways to Avoid Losing Money in Forex

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10 Ways to Avoid Losing Money in Forex

The global forex market is the largest financial market in the world and the potential to reap profits in the arena entices foreign-exchangetraders of all levels: from greenhorns just learning about financial markets to well-seasoned professionals with years of trading experience. Because access to the market is easy—with round-the-clock sessions, significant leverage, and relatively low costs—many forex traders quickly enter the market, but then quickly exit after experiencing losses and setbacks. Here are 10 tips to help aspiring traders avoid losing money and stay in the game in the competitive world of forex trading.

Do Your Homework

Just because forex is easy to get intodoesn’t mean due diligence should be avoided. Learning about forex is integral to a trader’s success. While the majority of trading knowledge comes from live trading and experience, a trader should learn everything about the forex markets, including the geopolitical and economic factors that affect a trader’s preferred currencies.

Key Takeaways

  • Do your research and seek for a reliable broker to prevent losing money in foreign exchange.
  • Use a practice account before going live, and keep analytical methods to a minimal to ensure their effectiveness.
  • When you go live, it’s critical to apply correct money management practices and to start modest.
  • Maintain a trading log and limit your use of leverage.
  • Make sure you understand the tax ramifications and run your company like a business.

Homework is an ongoing effort as traders need to be prepared to adapt to changing market conditions, regulations, and world events. Part of this research process involves developing a trading plan—a systematic method for screening and evaluating investments, determining the amount of risk that is or should be taken, and formulating short-term and long-term investment objectives.

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Find a Reputable Broker

The forex industry has much less oversight than other markets, so it is possible to end up doing business with a less-than-reputable forex broker. Due to concerns about the safety of deposits and the overall integrity of a broker, forex traders should only open an account with a firm that is a member of the National Futures Association (NFA) and is registered with the Commodity Futures Trading Commission (CFTC) as a futures commission merchant. Each country outside the United States has its own regulatory body with which legitimate forex brokers should be registered.

Traders should also research each broker’s account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies. A helpful customer service representative should have the information and will be able to answer any questions regarding the firm’s services and policies.

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Use a Practice Account

Nearly all trading platforms come with a practice account, sometimes called a simulated account or demo account, which allow traders to place hypothetical trades without a funded account. Perhaps the most important benefit of a practice account is that it allows a trader to become adept at order-entry techniques.

Few things are more detrimental to a trading account (and a trader’s confidence) than accidentally entering or closing a position. It is not unusual for a beginner trader, for example, to add to a losing position instead of closing it. Multiple order entry failures might result in massive, unprotected losing transactions. Aside from the disastrous financial consequences, making trading blunders is very stressful. Perfect practice makes perfect. Before putting actual money on the line, practice with order entries.

$6.6 trillion

The daily average volume of trade in the worldwide currency market.

Keep Charts Clean

When a forex trader creates an account, it may be tempting to use all of the technical analysis tools available on the trading platform. While many of these indicators are well-suited to the forex markets, it is vital to note that in order for them to be useful, analytical methods should be kept to a minimum. Using multiples of the same sort of indicator, such as two volatility indicators or two oscillators, may become redundant and even provide contradictory indications. This must be avoided.

Any analytical approach that is not employed on a regular basis to improve trading success should be deleted from the chart. Pay attention to the general appearance of the workspace in addition to the tools used on the chart. The selected colors, typefaces, and price bar types (line, candle bar, range bar, etc.) should result in an easy-to-read and comprehend chart, enabling the trader to adapt to changing market circumstances more efficiently.

Protect Your Trading Account

While considerable emphasis is placed on generating money in forex trading, it is as crucial to understand how to prevent losing money. Money management skills are an essential element of the process. Many expert traders would agree that one may join a position at any price and still earn money—what counts is how one exits the deal.

Knowing when to accept your losses and move on is an important part of this. Using a protective stop loss—a method aimed to maintain current profits or resist additional losses via the use of a stop-loss order or limit order—always is an excellent approach to ensure that losses stay fair. Traders may also choose a limit daily loss amount, over which all positions are terminated and no new trades are started until the following trading session.

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While traders should aim to prevent losses, they should also plan to safeguard gains. Money management tactics such as trailing stops (a stop order that may be put at a percentage away from a security’s current market price) can assist protect wins while still allowing a transaction to expand.

Start Small When Going Live

When a trader has completed their studies, spent time on a practice account, and developed a trading strategy, it may be ready to go live—that is, to begin trading with real money at risk. There is no way to imitate actual trading with practice trading. As a result, while going live, it is critical to start modestly.

Emotions and slippage (the gap between the projected price of a deal and the price at which the trade is actually performed) are factors that cannot be completely understood and adjusted for until trading occurs in real time. Furthermore, a trading strategy that worked well in backtesting or practice trading may fail catastrophically when deployed to a live market. A trader may analyze their trading strategy and emotions by beginning small, and get more skill in executing accurate order inputs without jeopardizing their whole trading account.

Use Reasonable Leverage

Forex trading is unusual in terms of the degree of leverage available to its players. One reason forex attracts active traders is the possibility of making potentially huge gains with a tiny investment—as low as $50. Leverage, when employed correctly, has the potential for development. However, leverage may also be used to magnify losses.

By basing position size on account balance, a trader may regulate the amount of leverage employed. For example, if a trader had $10,000 in his or her forex account, a $100,000 position (one standard lot) would be leveraged at 10:1. While the trader may create a much bigger account to increase leverage, a smaller position limits risk.

Keep Good Records

A trading log is an excellent tool to learn from both losses and gains in forex trading. Keeping track of trading activities, including dates, instruments, gains, losses, and, probably most importantly, the trader’s personal performance and emotions, may be very valuable to developing as a good trader. A trade log, when examined on a regular basis, gives valuable feedback that allows for learning. “Insanity is doing the same thing over and again and expecting different results,” Einstein reportedly stated. Traders who do not maintain a trading diary and keep solid records are more likely to repeat the same errors, reducing their chances of becoming lucrative and successful traders.

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Know Tax Impact and Treatment

To be prepared for tax season, it is critical to understand the tax consequences and treatment of forex trading activities. Consultation with a trained accountant or tax professional may help people avoid surprises and take advantage of different tax rules, such as marked-to-market accounting (recording the value of an asset to reflect its current market levels).

Because tax regulations change on a regular basis, it is advisable to establish a connection with a trustworthy and dependable expert who can advise and handle all tax-related concerns.

Treat Trading as a Business

It is critical to approach forex trading as a company and to remember that individual victories and losses are insignificant in the short term. What matters is how the trading firm operates over time. As a result, traders should strive not to get unduly emotional over victories or losses, and instead regard it as simply another day at the business.

Forex trading, like any other company, has expenditures, losses, taxes, risk, and unpredictability. Furthermore, much as small firms seldom become profitable quickly, most forex traders do not. Planning ahead of time, establishing reasonable objectives, remaining organized, and learning from both triumphs and disappointments will all contribute to a long and prosperous career as a forex trader.

The Bottom Line

Many traders are drawn to the global forex market because of the minimal account requirements, 24-hour trading, and access to large sums of leverage. When addressed as a company, forex trading may be lucrative and satisfying, but achieving success is incredibly difficult and time-consuming. Traders may increase their chances of success by performing research, avoiding over-leveraging positions, using smart money management strategies, and considering forex trading as a business.

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